Before investing in any asset it’s imperative to understand the dynamics and fundamentals behind your investment. So In order to understand Cryptocurrencies, we need to understand what they are, where they come from and why they exist.
Why was it created?
In the 2008 financial crash, an alias known as Satoshi Nakamoto created A virtual currency that couldn’t be controlled, printed or manipulated by the minorities in power.
So when governments make bad decisions the rest of us don’t become the consequence to their bad decision making and it wouldn’t affect our livelihoods.
The main reason why this is so empowering is that it removes the power from governments around the world and removes the need for banks and 3rd party facilitators and their high fees, while putting the power back in your pocket, and sending money as quickly and conveniently as you would send an email.
The most important takeaway from this, is the fact that its built on a community driven network, known as the blockchain
What is the Blockchain?
In simple terms, a blockchain is a time stamped ledger system that is maintained by a cluster of distributed computers, that is not owned by a central authority.
Each of these blocks of data is secured and bound to each other using cryptographic principles. It is the very definition of a democratized system. Since it is a shared and immutable ledger, the information in it is open for anyone and everyone to see. Hence, anything that is built on the blockchain is by its very nature transparent and everyone involved is accountable for their actions.
How does cryptocurrency work on the blockchain?
Let’s say that Johnny, who in the US,
wants to pay 100$ to Mike who is in South Africa:
Now, normally this would take 3 days,
expensive banking fees, clearance from regulators as well as the need for a bank.
Let’s now assume that Johnny has now bought 100$ worth of bitcoin, who sends his coin to Mike over the blockchain network.
This takes minutes, small transaction fees and computers known as “Miners” who confirm the transaction and basically act as a bank and an accounting ledger.
When A sends money to B these computers known as “Miners” input that data onto its ledger system and for maintaining the worldwide ledger system, the computer then gets rewarded with a percentage of the cryptocurrency that’s being sent or received. Lastly, the transaction is then timestamped, enforcing a layer of security, disallowing anyone to edit the transaction, essentially eliminating the potential for corruption.
Unlike a bank which is a centralized point with hidden ledgers, miners are decentralised computers scattered around the world, owned by ordinary people. The ledger system is open source, so all transactional data can be viewed by anybody from anywhere at any time.
A little bit about mining
We now understand that mining is an analogy for computers who are rewarded with currency for maintaining the global ledger System, similar to mining for gold, hence Miners.
Here’s an analogy to help you
understand the process of mining:
So remember in school when a teacher asked the class a question and the guy at the front of the class with the glasses(fastest brain) always answered first and was rewarded with a sucker?
It’s exactly the same concept but being rewarded with cryptocurrency coin. The computers with the “fastest brain” fastest chips, highest power who answer to the transaction first is then rewarded with coin.
Are you ready?
Let’s get started!
We have put together a step by step guide to assist you in your crypto journey
Heres how it works:
- Jack pays John 1 Bitcoin, the transaction is encrypted, meaning that the message that “Jack has paid John” goes from english to numerical sequence.
- These computers need to figure out what the message is by decrypting the message back into plain english from numerical and so a math equation is created for these computers to figure out what the answer is in the shortest space of time.
- For example 1+3(input) = 4(output). Easy when you have the information of the input. However the computers receive only the output, the answer; 4, so its up the computer so figure out whether is 1+3 or 2+2 or 0+4 etc, the computer that figures the answer out the fastest has to then won the transaction and records on its ledger, and for doing so the computer “miner” is then rewarded with coin.
WHAT IS DeFi?
Theoretically all cryptocurrency is
However, Bitcoin only covers the banking aspect of decentralised finance; transferring money to and from. So why are the “new generation” coins classified as DeFi? Quite simply, because they cover all aspects of financial services such as loans, savings plans, insurance etc. They cover more modern day services that are in line with traditional financial offerings. DeFi is to cryptocurrencies what Apple was to computer technology.
Have a look at the video below for an in-depth understanding: